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SPEAKER 1: The financial decisions made by the Archdiocese of Saint Paul and Minneapolis are mostly hidden. Since it's a religious institution, the nonprofit doesn't have to file paperwork with government regulators or answer to shareholders or a board of directors. There is a finance council that gives Archbishop John Nienstedt financial advice. But he alone can make spending decisions.

His decisions go well beyond the operations of the Chancery. The Archdiocese has indirect control over 188 parishes, 91 Catholic schools, and two seminaries that serve 825,000 Catholics. The top line budget summary of the Archdiocese looks healthy and is showing signs of recovery as investments in giving rebound from the Great Recession.

But the church faces uncertainty. Like Minnesota's population, the average age of parishioners is rising, and church documents show the number of parishioners and donors is dropping. Church leaders have said publicly they're confident they'll meet their upcoming fundraising goals, despite a backlash over how they've handled clergy sex abuse cases. But in private, they say they're in difficult financial waters.

GREG PAULUS: We have headwinds. We have significant headwinds on this.

SPEAKER 1: At a private meeting with priests in December, Archdiocese's fundraisers say they're changing the pitch they're making to donors. The meeting, which was recorded, and a copy provided to MPR news, shows church leaders are worried the clergy sex abuse scandal will harm the bottom line. Greg Paulus, Director of Development and Stewardship for the Archdiocese, told priests the annual Catholic services appeal will shift its focus from the Archdiocese, which is at the center of the abuse scandal, to other more popular programs like Catholic Charities.

GREG PAULUS: In picking those, we have deleted anything that has any semblance of money going to the core archdiocesan administrative functions.

SPEAKER 1: Paulus then encouraged priests to step up their own fundraising efforts.

GREG PAULUS: Because that's what-- they may be mad at the Archdiocese, but almost to a person, none of them expresses any anger at you. And so therefore, we need to leverage that. The Archdiocese has more than an image problem on its hands. MPR News has reviewed internal documents and interviewed key insiders who say the Twin Cities Archdiocese lacked key financial controls, mismanaged money and spent millions as a result of clergy misconduct since, at least, 2002.

Those millions came from Catholics who donated to the church on faith, faith that their money will help the poor, build the church, and increase the flock. But top church leaders also spent about 3% of overall revenues over the last decade on costs resulting from clergy misconduct. They include payments to convince priests to leave active ministry, financial support for children fathered by priests, and money for legal settlements. Scott Domeier, a former top accountant for The Archdiocese, who was convicted last year of stealing from the church, says the clergy misconduct budget was so concealed that even a trained eye wouldn't notice the expenditures.

SCOTT DOMEIER: There are definitely pieces of the funds that came in that were being spent on things that were really held quiet.

SPEAKER 1: Both Domeier and Jennifer Haselberger, the top canon lawyer for The Archdiocese through April of last year, say the chancery worked to keep the transgressions of priests from becoming known. For example, Haselberger said Archbishop John Nienstedt agreed to repay an elderly woman's estate after investigators started focusing on a parish priest in charge of her funds.

Court records show roughly $30,000 was missing from Marian McCauley's account. The person who oversaw the estate was father Corey Belden, a parish priest currently serving in Hamel, Haselberger, says church leaders decided to pay the money back to McCauley's estate to avoid further scrutiny. She called it an extraordinary act.

JENNIGER HASELBERGER: It's well out of the scope of what would happen on a regular basis, and there was a lot of questions about the ethics of using church funds for something like that.

SPEAKER 1: Court records show the money was paid back and Belden was dismissed as McCauley's conservator in 2009. NPR News contacted Belden earlier this week. He refused to comment. The Archdiocese released a statement saying Belden had a gambling problem and is making restitution to the Archdiocese. McCauley's niece, Laura Rohn, still isn't happy. She says Catholics should know where their money is going.

LAURA ROHN: The church has paid it back. That doesn't-- in my eyes, that doesn't make it right.

SPEAKER 1: Internal financial reports reviewed by MPR News show that between 2002 and 2011, The Archdiocese spent nearly $10.9 million on costs related to misconduct under Archbishops Flynn and Nienstedt. Church officials even set up accounting codes to distinguish types of expenses. One code is for costs associated for priests accused of sexually abusing children. A second code is for costs related to priests allegedly involved in abuse of adults or financial conduct.

Items with these codes include expenses for therapy, costs for victims and priests. Money was spent for legal fees for priests, for victims, settlements, and a $25,000 payment itemized as child support. The Archdiocese also paid more than $100,000 over a decade to a private investigator. Scott Domeier, the former accountant, says church leaders made decisions on payments like this with little consideration of how it affected the budget.

SCOTT DOMEIER: I don't think that they would look at the financial aspect of it at all when they were cutting the deals.

SPEAKER 1: Domeier says, $126,000 annuity was established in 2003 for a child fathered by a priest. Hundreds of thousands of dollars were also spent by church leaders to rid themselves of problem priests.

SCOTT DOMEIER: They were just doing whatever they could to remove guys from ministry.

SPEAKER 1: Take the case of Father Stanley Kozlak. Church records say Kozlak fathered a child in 2000. To get him out of ministry, former Archbishop Harry Flynn signed a retirement agreement with Kozlak in 2002. The agreement, obtained by NPR news, provided Kozlak with a $9,900 a month disability payment for life, $800 a month in rent for life and money to replace his Social Security payments. Kozlak declined to be recorded for broadcast, but said it was general knowledge that he fathered a child.

He declined to discuss his retirement agreement, but said, quote, "The are matters I dealt with in my life. And believe me, I paid a price for it." The Archdiocese did not respond to comments about Kozlak. Domeier says Flynn, his successor, Archbishop Nienstedt, and their top deputies knew about payments to Kozlak and other priests. He said other employees were suspicious but didn't investigate.

SCOTT DOMEIER: Everybody knew not to ask questions, because what was behind those requests for payments never got into our files, and that was on purpose.

SPEAKER 1: In fact, Domeier took advantage of a system that wasn't just secret, it was also sloppy.

SPEAKER 2: OK, ma'am, you go to the of back to the window.

SPEAKER 1: Domeier is currently serving a three-year prison sentence at the correctional facility. He pleaded guilty to stealing more than $650,000 from the Archdiocese between 2005 until 2011. Part of his theft scheme involved using archdiocesan money to cover his personal expenses, and in some cases, he wrote priests support in the memo line to avoid scrutiny. Domeier said he never thought he'd be prosecuted, especially after seeing how church leaders quietly handled clergy misconduct. He said he lost his moral compass after dealing with problem priests.

SCOTT DOMEIER: I was their primary financial contact if there were issues with their payments, and I would have to listen to their complaints about why they didn't get their money on X day, they deserved it, or why can't I get more money.

SPEAKER 1: Experts who study financial controls say leaders should have discovered Domeier's activity right away.

CHARLEZ ZECH: It's difficult to tell whether the Archdiocese simply lacked controls or whether the controls that were in place were not being enforced.

SPEAKER 1: That's Charles Zech, Director of Villanova University's Center for Church Management and Business Ethics. Zech published a study in 2007 saying 85% of the Catholic diocese's in the US had experienced embezzlement between 2001 and 2006. Zech said religious leaders often don't follow proper financial controls, like centralizing checks or requiring two signatures on checks over $1,000. But by now, he said, guidelines should be established and followed, especially after his study and guidelines put forward by the US conference of Catholic bishops in 1995.

CHARLEZ ZECH: It's hard for me to imagine how that can possibly happen. Given all the warnings, we've seen in other dioceses of the same types of problems.

SPEAKER 1: Church leaders learned of Domeier's activities in December of 2011. They quickly hired Ernst Young to review all of Domeier's financial activity over $5,000. But the auditors started asking about questionable payments to priests. Jennifer Haselberger, the former top canon lawyer at the Archdiocese, says that's how she first learned of payments to priests who had sexual contact with children and adults.

JENNIGER HASELBERGER: Being responsible for records and things, I only uncovered those payments really as part of the audit when Ernst and Young came and asked me about them. And you'd think that would be things that would easily be visible in their clergy files, but weren't.

SPEAKER 1: Haselberger says Archdiocesan Attorney Andrew Eisenzimmer told her questions about those payments were outside the scope of the review. Haselberger says Eisenzimmer told her to refer the auditors inquiries to him. Eisenzimmer declined to be recorded for broadcast, but he says he didn't put any restrictions on Ernst Young. Several charitable governance experts say they're puzzled why the auditors didn't do a full review of the Archdiocese's books after learning of Domeier's theft. Jack Siegel is a Chicago-based tax attorney who teaches charity governance.

JACK SIEGEL: The minute someone tells me you don't need to look here, that's the first place I want to look.

SPEAKER 1: Siegel has been raising concerns about church finances for nearly a decade. He says proper financial controls should be a basic step for any nonprofit, especially one with $56 million in total assets in the last fiscal year.

JACK SIEGEL: Why didn't you have better internal controls in place? And surprisingly, what is missing in the internal controls that led to the fraud is not anything that's rocket science.

SPEAKER 1: It isn't certain what financial controls the Archdiocese put in place as a result of Domeier's activity. Church leaders have refused for years to release detailed financial statements. The Archdiocese issued a statement this week saying they'll change that practice in February by releasing audited financial statements for fiscal year 2013.

The statement also said, Chief Financial Officer Tom Mertens, who was hired in December 2012, made recommendations to improve transparency. The Archdiocese declined interview requests for this story. The financial decisions made at the chancery go well beyond the bottom line of the archdiocesan budget. The actions taken by the church also affect the parishes and the Catholics who attend mass there.